Inflation

Concerns

Hit Bonds

Jobs Report Spurs

Fears Of Fed Move

March 6, 1994|Bloomberg Business News

NEW YORK — U.S. bonds dropped after economic reports suggested inflation is on the rise, fueling concern that the Federal Reserve will soon raise interest rates.

The Fed will raise rates by at least half a point within days after Friday's employment report showed the economy added 217,000 jobs in February, said Ron Connors, head trader at Bear, Stearns & Co. Severe weather should have kept the number lower, he said.

"It was stronger than I thought," Connors said. "But it's hard to analyze because of the weather."

The Fed raised its federal funds rate - the rate banks charge one another for overnight loans - by 1/4 point to 3.25 percent on Feb. 4, tightening credit for the first time in five years. Ever since, bonds have finished most sessions lower, or at least below each day's highest price.

"I want to think it's a fifty-fifty probability" that the Fed will soon raise rates, Connors said. "They should tighten by 50 basis points. But I think that 25 basis points is more likely."

The benchmark 30-year bond was down 1 1/32 in recent trading to yield 6.86 percent, up two basis points.

Bonds dropped a point after the Labor Department's employment report, which was higher than the expected 140,000. Then bonds rebounded to unchanged before slumping 1/2.

The yield reached 6.92 percent Wednesday, the highest since June 8, before closing down a basis point Thursday at 6.77 percent. That is 100 basis points higher than the record low yield of 5.77 percent, set Oct. 15.

The two-year note yield was unchanged at 4.88 percent in recent trading. The note yields 198 basis points less than the 30-year bond. The drop in notes indicates traders are still betting the Federal Reserve will raise interest rates.

Also helping spark concern over inflation was a rise of 85 points in the CRB index of commodity prices and a report from the Center for Business Cycle Research that showed inflation on the rise.

The rise in commodity prices was led by the price of cotton, which is hitting new highs amid a worldwide shortage. Three of the world's six largest cotton exports have restricted exports to sustain internal demand.

In the inflation report, the Center for International Business Cycle Research at Columbia University said the components of its leading inflation index for February rose, an analyst at the center said.

The four components are the Journal of Commerce's index of raw industrial-material prices, the percentage of the population employed, and indexes on vendor performance and prices paid from the National Association of Purchasing Management.

Financial markets pay attention to the CIBCR index because Federal Reserve Chairman Alan Greenspan is said to follow it.

Separately, the Commerce Department reported that its monthly index of leading economic indicators rose 0.3 percent in January. Economists had expected an increase of 0.4 percent.

The Fed may raise rates 1/2 point as soon as Monday, said Matthew Alexy, a government bond market strategist at CS First Boston.

"We think they're going to go sooner rather than later," Alexy said. "This market isn't going to gain any stability until they go again. You're not going to see any buyers" of bonds until the Fed acts again to contain rising inflation expectations.

"This gradualist approach is gnawing away at the market," Alexy said.

Elias Bikhazi, a financial economist at Deutsche Bank Securities, also said the Fed would raise rates Monday, but only by 1/4 point.

"Certainly, I think next week" the Fed will raise rates, he said.

Not everyone agreed the employment report compels the Fed to act sooner than March 22, the date of the next meeting of the Federal Open Market Committee, its policy-making committee.

"I think all this talk about the Fed moving today is preposterous," said Morton Swinsky, head of trading at Fuji Securities. "Why would people even make that assumption based on the numbers this morning? Will they move at some point? Yeah, sure. But I don't think it will be this afternoon."